How Does a Reverse Mortgage Work?

Here is a Step-by-Step Outline of Exactly How a Reverse Mortgage Works:

Reverse Mortgage Eligibility:

• • Age Eligibility for Reverse Mortgage:
    • The primary eligibility criterion is that the youngest borrower must be at least 62 years old
  • Home Ownership Eligibility for Reverse Mortgage: 
    • You must own your home outright or have a low mortgage balance that can be paid off with the reverse mortgage funds
  • Primary Residence:
    • The home you obtain a reverse mortgage on must be your primary residence at the time of proceeding with the loan.

Counseling for HECM:

• • If you’re considering a HECM, you’re required to undergo counseling from a HUD-approved housing counselor. This session helps ensure you understand all aspects of the loan. Your lender will initiate this counseling from a HUD-approved housing counselor, but the lender doesn’t know who the counselor is or have any dealings with any counselors to assure unbiased and objective counseling to aid your understanding and decision making.

Reverse Mortgage Application Process:

• • When you apply through a lender who offers reverse mortgages, you will need to provide:
    • Proof of age
    • Proof of home ownership
    • Financial information for a financial assessment

Home Appraisal:

• • An appraisal is conducted to determine your home’s current market value
    • The amount you are able to borrow from a reverse mortgage does depend on the current value of your home

Reverse Mortgage Loan Calculation:

• The amount you can borrow with a reverse mortgage depends on:
  • • Your age(older borrowers can borrow more)
    • The appraised value of your home(or the FHA’s lending limit for HECMs)
    • Current interest rates
    • The specific reverse mortgage product

Reverse Mortgage Loan Terms & Options:

• • Payment Options(You decide how you want to receive your funds):
    • Lump Sum: One-time payment at loan closing
    • Monthly Payments: Fixed monthly payments for a set term or for life(tenure payments)
    • Line of Credit: Access funds as needed, with unused amounts potentially growing over time
    • Combination: A mix of these options is also possible

Reverse Mortgage Loan Closing:

• • You sign loan documents, just like with any mortgage. Closing costs are financed into the loan amount, so you don’t have to bring any funds to closing in order to close your reverse mortgage loan

Living with a Reverse Mortgage Loan:

• • No Monthly Mortgage Payments:
    • You don’t pay monthly mortgage payments, but you are responsible for the following:
      • Pay property taxes
      • Maintain homeowners insurance
      • Keep the home in good repair
  • Interest and Fees:
    • These are added to the loan balance each month, increasing the amount owed on the reverse mortgage

Reverse Mortgage Loan Repayment:

• • The loan becomes due when:
    • The last surviving borrower dies
    • The borrower permanently moves out or sells the home
    • The borrower fails to meet the obligations of the loan like paying taxes and insurance noted above
      • These are standard for any mortgage loan
  • Repayment typically comes from selling the home. If the sale proceeds exceed the loan balance, the surplus goes to the borrower or their heirs. If it’s less, the loan is settled for the home’s value due to the non-recourse nature of HECMs. 
    • You can never owe more than your home is worth with a Reverse Mortgage HECM

Heirs’ Options:

• • Heirs to the family member who obtained the reverse mortgage have a few options on how to handle the home and any loan balance:
    • Pay off the loan and keep the home
    • Refinance the balance into a forward mortgage and make payments
    • Sell the home to pay off the reverse mortgage
      • Remember, Reverse Mortgages are non-recourse, meaning you cannot owe more than the home is worth if you decide to sell the home to pay off the loan

Reverse Mortgage Financial Considerations:

• • The loan balance grows over time, reducing the home equity available for inheritance, but offset by any appreciation of the home value over the term of the loan
  • Loan proceeds may affect eligibility for certain government benefits if the funds are not managed correctly
  • There are costs associated with setting up and maintaining the loan, which can be rolled into the loan amount and not impacting payment options of loan funds

Reverse mortgages can be a useful financial tool for eligible seniors looking to supplement income, pay for healthcare, or cover living expenses, but they also come with complexities that should be thoroughly understood before proceeding.

Learn more about eligibility requirements for a reverse mortgage, situations where a reverse mortgage is best used, and common myths around reverse mortgage that we debunk with facts